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On April 27, 2012, the federal government announced two proposed
amendments to the Investment Canada Act, the legislation
that regulates foreign investment in Canada. One relates to
the transparency of the review process. The other relates to
the government's ability to enforce undertakings given by
foreign investors. Neither are likely to be particularly
earth-shattering.
Transparency: The Minister of Industry would be
permitted to publicly disclose that he has sent a preliminary
notice to the foreign investor advising that he is not satisfied
that the investment is likely to be of net benefit to Canada, which
is the test applied to proposed investments that exceed the
applicable review threshold under the Act. The Minister would
also have the right to publicly explain his reasons for sending the
notice, provided that doing so would not cause harm to the target
Canadian business or the foreign investor.
This amendment seems to address the fairly extensive criticism
directed at the government over the past several years relating to
a perceived lack of transparency in the review process,
particularly in the context of its controversial rejection of BHP
Billiton's proposed acquisition of Potash
Corporation.
As a practical matter, very few transactions ever get to a stage
where the Minister delivers a preliminary rejection to the foreign
investor. Indeed, the 75 day (45 + 30) review period is
largely spent working with the government staff to put together a
package that would be acceptable to the Minister.
Accordingly, we do not expect the new power to come into play in
the vast majority of transactions.
Enforcement: The government would be permitted
to require an investor to post security that could be applied to
the payment by an investor of any penalties imposed by a court in
response to the investor's failure to comply with the
undertakings given by the investor in conjunction with securing a
net benefit to Canada determination.
In late 2011, the government and U.S. Steel settled a
longstanding dispute over compliance with the undertakings U.S.
Steel had given in conjunction with its acquisition of Stelco in
2007. U.S. Steel took the position that the fundamental
change in worldwide economic conditions that commenced shortly
after it gave the undertakings justified its deviation from
them. In the course the litigation, the Act was frequently
criticized in the media as being light in the area of enforcement
powers. Although the government has not explicitly presented
it as such, this amendment is almost certainly intended to address
those concerns.
It is worth noting that the Act already provides for a
substantial penalty of up to $10,000 per day of non-compliance with
undertakings, and a foreign investor who has given undertakings by
definition must have at least some assets in Canada against which a
penalty could be realized. However, the process for enforcing
these penalties is complicated and time-consuming.
The government has not yet provided any guidance as to what
amount of security it will require, or whether it will require
security as a condition of approving all, or only some, reviewable
transactions, or what factors it will consider in deciding the
forgoing in the context of any particular transaction. The
government has consistently stated that Canada is "open for
business" in terms of foreign investment. There is
obviously some degree of inconsistency between these two
goals. In deciding how high to set the bar on security, the
government will presumably attempt to not effectively undermine its
competing goal of encouraging foreign investment.
The amendments have not yet been passed into law. However,
because they are part of the budget implementation legislation that
was tabled in Parliament on April 26, 2012, we anticipate that they
will be passed into law fairly quickly.
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